Institutional Investors Demand More Control as Interest in Real Estate Assets Grows, According to New Research from State Street

Thursday, December 8, 2011 8:08 am EST

Dateline:

LONDON
"Real Estate: New Opportunities for Institutional Investors"

New research from State Street Corporation (NYSE: STT), one of the world's leading providers of financial services to institutional investors, has found that a broad range of institutional investors, including pension funds, insurance companies, and sovereign wealth funds, is set to increase their exposure to real estate as an asset class. However, having learned from experiences during the financial crisis, investors are seeking much greater control and flexibility over their real estate exposure. According to State Street, regulatory changes are fundamentally changing the landscape for real estate investment on the part of both investors and real estate managers.

According to a Vision Focus paper published by State Street entitled, “Real Estate: New Opportunities for Institutional Investors,” the appetite for real estate among institutional investors continues to be strong, with recent research indicating that real estate remains the largest block of alternative asset allocation for pension funds1. Prime property remains the most attractive to large institutional investors, with interesting opportunities also noted in regions such as Eastern Europe.

With this renewed appetite, State Street’s research found that investors have become more demanding of real estate managers and are insisting on more accountability. Investors want closer relationships with their fund managers and are requesting increased information both at the outset and during the lifecycle of the fund. The research also reveals that investors are seeking increased transparency on underlying investments and fees. According to State Street’s research, the typical length of time between invitation and closing has nearly doubled since 2007 as investors take longer to make a final decision and pay greater attention to due diligence (see tables below).

Reflecting a greater focus on risk management, the study finds real estate investors are seeking to play an active role demanding independence on the boards and representation on investment committees of the funds in which they participate. In addition, standard periodic reporting is not always sufficient to satisfy their requirements for improved insight into the fund and the performance of underlying assets in which they are invested.

The Vision Focus paper states that while fund managers face greater costs in supplying the information required of them, new industry standards and impending regulation will create further reporting duties. According to the research, large fund managers may meet these further demands by scaling up internally, but other fund managers may decide that they cannot afford to operate in these new conditions and opt to outsource to a professional service provider to meet investors’ increasing demands. Alternatively, they may decide to consolidate with other fund managers to enable efficiencies in meeting clients’ requirements in the post-crisis real estate fund management environment.

Simon Burgess, vice president of real estate fund services for State Street’s Global Services business in Europe, Middle East and Africa, commented on the research findings, “The real estate market and the expectations of investors have both changed radically since 2007. Regulatory pressures are forcing organisational change, which is set to increase in the coming months. However, the demand for real estate as an investment opportunity will continue as investors seek exposure to this uncorrelated, alternative asset class through varied routes most suited to their preferred structure, risk appetite and return requirements.

“The real estate sector is responding to the imperatives of increasing regulation and rigorous reporting with a renewed sense of innovation. Property fund managers are coming together and we are also seeing our clients outsource more to our specialist real estate teams. We believe that with third-party service providers at their side to provide the local execution and property expertise that is fundamental to investing in bricks and mortar, those real estate fund mangers with global ambitions and those with niche, local market knowledge have significant opportunities, especially at this time in the economic cycle.”

For further information on the study please visit www.statestreet.com/vision/realestate.

About State Street Corporation

State Street Corporation (NYSE: STT) is one of the world's leading provider of financial services to institutional investors including investment servicing, investment management and investment research and trading. With $22 trillion in assets under custody and administration and $1.9 trillion in assets under management at September 30, 2011, State Street operates in 26 countries and more than 100 geographic markets. For more information, visit State Street’s web site at www.statestreet.com.

*This AUM includes the assets of the SPDR Gold Trust (approx. $64 billion as of September 30, 2011), for which State Street Global Markets, LLC, an affiliate of State Street Global Advisors serves as the marketing agent.

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State Street Corporation
Lucy Davidson, +44 203 395 4374
ldavidson@statestreet.com

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